Krugman: Inequality is impeding economic recovery

By Paul Krugman

Updated 9:03 pm, Friday, May 4, 2012

Before the Great Recession, I would sometimes give lectures in which I would talk about rising inequality, making the point that the concentration of income at the top had reached levels not seen since 1929. Often, someone in the audience would ask whether this meant that another depression was imminent.

Well, whaddya know?

Did the rise of the 1 percent (or, better yet, the 0.01 percent) cause the Lesser Depression we're now living through? It probably contributed. But the more important point is that inequality is a major reason the economy is still so depressed and unemployment so high. For we have responded to the crisis with a mix of paralysis and confusion - both of which have a lot to do with the distorting effects of great wealth on our society.

Put it this way: If something like the financial crisis of 2008 had occurred in, say, 1971 - the year Richard Nixon declared that "I am now a Keynesian in economic policy" - Washington would probably have responded fairly effectively. There would have been a bipartisan consensus in favor of strong action, and there would also have been agreement about what kind of action was needed. But that was then. Today, Washington is marked by a combination of bitter partisanship and intellectual confusion - and both are, I would argue, largely the result of extreme income inequality.

On partisanship: Thomas Mann and Norman Ornstein have been making waves with a new book acknowledging a truth that, until now, was unmentionable in polite circles. They say our political dysfunction is largely because of the transformation of the Republican Party into an extremist force that is "dismissive of the legitimacy of its political opposition." You can't get cooperation to serve the national interest when one side sees no distinction between the national interest and its own partisan triumph.

So how did that happen? For the past century, political polarization has closely tracked income inequality, and there's every reason to believe that the relationship is causal. Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties. And the takeover of half our political spectrum by the 0.01 percent is, I'd argue, also responsible for the degradation of our economic discourse, which has made any sensible discussion of what we should be doing impossible.

Disputes in economics used to be bounded by a shared understanding of the evidence, creating a broad range of agreement about economic policy. To take the most prominent example, Milton Friedman may have opposed fiscal activism, but he very much supported monetary activism to fight deep economic slumps. Now, however, the Republican Party is dominated by doctrines formerly on the political fringe. Friedman called for monetary flexibility; today, much of the GOP is fanatically devoted to the gold standard. N. Gregory Mankiw of Harvard University, a Romney economic adviser, once dismissed those claiming that tax cuts pay for themselves as "charlatans and cranks"; today, that notion is very close to being official Republican doctrine. As it happens, these doctrines have failed in practice. For example, conservative gold bugs have been predicting vast inflation and soaring interest rates for three years and have been wrong every step of the way. But this failure has done nothing to dent their influence on the party. And why is the GOP so devoted to these doctrines? It surely has a lot to do with the fact that billionaires have always loved the doctrines in question, which offer a rationale for policies that serve their interests.

Which brings us to the question of what it will take to end this depression we're in. Many pundits assert that the U.S. economy has big structural problems that will prevent any quick recovery. All the evidence, however, points to a simple lack of demand, which could be cured quickly through a combination of fiscal and monetary stimulus.

No, the real structural problem is in our political system, which has been warped by the power of a small, wealthy minority. And the key to economic recovery lies in finding a way to get past that minority's malign influence.